Earnings Season Shows Business Demand for Working Capital Remains Robust

Although all eyes this earnings season might be focused on consumer spending, there are several puts and takes on business demand for working capital, particularly from what might be termed non-traditional providers such as Block and PayPal.

And, generally speaking, demand is robust.

The demand comes as the PYMNTS Intelligence report “Main Street Small Business Growth Exceeds GDP for First Time in Two Years” found that Main Street small- to medium-sized business (SMB) growth has exceeded gross domestic product (GDP) growth for the first time in two years. That expansion would feed into plans to tap working capital to keep expanding.

Block, parent company of Square, noted in its earnings presentation this week that there is a $17 billion “gross profit” opportunity for Square Loans, its business lending offering.

In its shareholder letter, the company said Square Loans facilitated approximately 142,000 loans totaling $1.45 billion in originations, up 32% year over year in the quarter. The company’s Form 10-Q with the Securities and Exchange Commission (SEC) noted that the commercial loans held for sale — which include Square Loans — stood at $435 million, down from $478 million at the end of last year. The year-ago filings detailed that commercial loans held for sale were $319 million in the June 2023 quarter.

An Untapped Opportunity

PayPal CEO Alex Chriss noted on an earnings conference call with analysts that small businesses represent an “untapped opportunity” for the company. With the launch of the company’s Complete Payments Platform, he said, “you get access to our working capital,” among other offerings such as payouts.

The company’s Form 10-K with the SEC indicated that its PayPal Working Capital and PayPal Business Loan products — collectively referred to as merchant finance offerings — were tied to the purchasing of approximately $774 million in the latest quarter through the first six months of the year.

“As of June 30, 2024, and December 31, 2023, the total outstanding balance in our pool of merchant loans, advances, and interest and fees receivable was $1.2 billion,” the company said in the filing.

In terms of the mechanics of the working capital products, PayPal said in the filing that merchants can borrow a certain percentage of their annual payment volume processed by PayPal and are charged a fixed fee for the loan or advance based on the overall credit assessment of the merchant.

The company’s metrics in the filing showed an improvement in credit quality, where, for example, roughly 90% of the merchant loans and advances were current, with 4.5% of the book 30 to 59 days past due, compared to 87% and 4.9% in the fourth quarter.

Separately, the PYMNTS Intelligence report “Embedded Lending: From the Lender’s Perspective,” commissioned by Visa, found that 37% of SMBs said they are highly interested in switching to providers that offer embedded lending options. Additionally, across the six markets surveyed, 83% of lenders offer embedded lending products to customers, compared to 55% that serve SMBs.

But there may be a bit of catch-up in the cards. Two-thirds of lenders that offer no embedded lending are interested in rolling out these products to SMBs in the next two years.